The income-tax department on Wednesday notified rules relaxing certain earlier conditions governing foreign fund managers in a bid to encourage them to move to India. Presently, most of them manage foreign capital to India out of Singapore, Dubai and London.

Finance minister Arun Jaitley in his budget speech last year had proposed steps to encourage the relocation.

“The present taxation structure has an inbuilt incentive for fund managers to operate from offshore locations. To encourage such offshore fund managers to relocate to India, I propose to modify the Permanent Establishment (PE) norms to the effect that mere presence of a fund manager in India would not constitute PE of the offshore funds resulting in adverse tax consequences,” he had said in the budget speech.

However, in the fine print, there were certain clauses that dissuaded such fund managers from moving to India. On Wednesday, the government set it right.The new rules provide for a pre-approval mechanism under which a fund can seek prior approval from the tax department and avail exemption under Section 9A of the Income Tax Act.

This will provide the much-needed certainty to the offshore funds. The section deals with treatment of income deemed to accrue or arise in India, and is taxable in India.

The latest circular also clarified that in case the investment in the fund is made directly by an institutional entity, the investor interest in the fund will be determined by looking through the entity.

This see-through approach in determining the number of investors in the fund will help in meeting the criteria that a fund should have a minimum of 25 members.

Sameer Gupta, leader-financial services tax and regulatory services at consulting firm EY, said the new guidelines is an important step forward for enabling onshore management of foreign capital.

“In addition to providing some important clarifications in relation to the qualifying conditions for the fund, the guidelines provide an option to the fund to seek a prior confirmation of its eligibility by making an application to the CBDT (Central Board of Direct Taxes), something which should give certainty of tax outcome for the fund. We expect global as well as domestic asset management firms to make an assessment of the potential opportunity and take advantage of this regime,” he said.Further relaxing the conditions, the rules say that the eligibility of the fund will be impacted only if the remuneration paid or payable by the fund to the fund manager has been determined to be not at arm’s length price or a price that would have been used for transaction with an unrelated party for a period of three previous years in succession or for any three out of the preceding four previous years.

A chance transfer pricing adjustment made by the tax department will not impact the eligibility, it said. It also clarified that a fund will not be able to own more than 26% in an Indian entity to avail exemption.

Girish Vanvari, national head of tax at KPMG India, said a couple of more clarifications are required to attract more funds to set up base in India. “It does not address two important issues i.e. a single investor cannot own more than 10% in the fund and 10 or less investors should own 50% or less. In addition one can argue whether the requirement of owning 26% or less in a company is adequate,” he said in a note.